Credit Unions or other businesses that pay certain kinds of income (interest or dividends) must file an information return Form 1099 with the IRS. 

In our case the information return shows payments that members received during the year. It also includes the recipient’s name and taxpayer identification number (TIN).  A TIN is a social security number (SSN), employer identification number (EIN), or individual taxpayer identification number (ITIN). 

These payments generally are not subject to withholding. Backup withholding, however, is required in certain situations. Payments subject to backup withholding can apply to most kinds of payments reported on Form 1099. In our case this includes Interest payments Form 1099-INT.

Withholding rules: When the member opens a new account, makes an investment, or begins to receive payments reportable on Form 1099, the member must furnish their TIN to the credit union or other business. In some cases, the member must furnish the member TIN in writing and certify under penalties of perjury that it is correct. In our case this is documented on a portion of our signature card form. The member must enter their TIN on the form and, if their account or investment will earn interest or dividends, the member must also certify that the member is not subject to backup withholding due to previous underreporting of interest and dividends. 

We must withhold at a flat 24% rate in the following situations:

• The member did not give us their TIN in the required manner.
• The IRS notifies us that the TIN the member gave is incorrect.
• The IRS notifies us to start withholding on interest or dividends because the member had underreported interest or dividends on their income tax return (The IRS will do this only after it has mailed the member four notices over at least a 120-day period so they will know if it applies to them.)
• The member fails to certify that they are not subject to backup withholding for underreporting of interest and dividends. 

Bottom line, if the member doesn’t know what you are talking about, hasn’t received an IRS notice informing them of the requirement, they then certify they are not subject to backup withholding.

What do you say when the member ask about Backup Withholding?

"If you are subject to backup withholding, you would have been notified by the IRS. If you are subject, there may be a levy on your income earned in order to collect taxes owed. If you have never heard of it before, you are likely not subject."